Inventory costing method

of manufacturing business
 Presented for
Dr. H. M. Mosarof Hossain
Professor
Department of Finance
University of Dhaka
 Presented By
Elius Chowdhury ID:35016
Proma Sen Gupta ID:35018
FarjanaYesmin ID:35030
Khondoker Nurul Huda ID:35039
Farhana Rifat Toma ID:35034
Nusrat Jahan Monmon ID:35032
 objective
 The broad objective of this study is to see the status of IAS-2 in manufacturing
organization of Bangladesh.
 The specific objectives are; Identification of IFRS-(IAS-2) compliance and
noncompliance organization.
 Identifying the area of compliance and noncompliance.
 Methodology

Population and Sample Form of The Study

Sample Size and Sampling Technique

 Introduction
Inventory: The materials or goods held by a business for the purpose of making profit.
The
Three costing method
categories of used to determine the value of inventory.
inventories:
There are several methods of inventory calculation. The
selection of the way of inventory valuation by a business can
Raw Material (RM)
directly impact its financial statements including cash flow
statements, income statement, and balance sheet. It is important
for businesses to track
Work the number
in progress (WIP) and value of items sold
correctly so that they can correctly reach the value of the items
they have in stock.
Finished Goods
 Inventory costing method
 Inventories are the life of a business.
 Inventories are necessary in order to generate sales and returns(in), sales generate
profit for the business.

 The method used to account for inventory costing can change the values
significantly.
 Companies can choose from several methods of costing, each of which has a
different impact on which costs are used for remaining inventory and which are
used for cost of goods sold
 Inventory costing method(Cont…)
A company uses either the perpetual or periodic inventory method to keep track of their
inventory. The valuation method used to estimate the cost of the ending inventory varies;
namely:

Specific-identification
FIFO
LIFO
Weighted Average
Findings
 Findings
Inventory Valuation in Bangladesh Manufacturing Sector
Applying Inventory Costing Method

FIFO
11%

Not Discloser
18% WA
WA+FIFO
Not Discloser
WA FIFO
WA+FIFO 68%
3%
 Findings (COnT…)
Summary of sample manufacturing company’s
inventory valuation methods
Name of Industry Weighted- FIFO WA+FIFO LIFO NOT
Average Cost DISCLOSED
4 0 1 0 0
Cement
2 0 0 0 1
Ceramics
15 1 1 0 2
Miscellaneous
7 1 0 0 7
Food & Allied
11 4 0 0 0
Pharmaceuticals &
Chemicals
39 6 2 0 10
Total
68% 11% 4% 0% 18%
In%
 Findings (COnT…)
Inventory Valuation in European Countries Manufacturing Sector
Country FIFO Weighted Average Combination of Two Methods Total Number
Australia 6 9 2 17
England 10 11 2 23
China 1 25 1 27
France 5 15 7 27
Germany 4 10 2 16
Italy 1 7 0 8
New Zealand 9 6 1 16
Sweden 7 0 0 7
Switzerland 3 5 1 9
Spain 0 3 1 4
Other European Countries 13 10 2 25
Total Number 59 101 19 179
 Findings (COnT…)
Cement Industry

Cement Industry
90%
WA, 80%
80%

70%

60%

50%

40%

30%
WA+FIFO, 20%
20%

10%
Not Discloser, 0% FIFO, 0%
0%
WA WA+FIFO Not Discloser FIFO
 Findings (COnT…)
Ceramics

Ceramics
70% WA, 67%

60%

50%

40%
Not Discloser, 33%
30%

20%

10%
WA+FIFO, 0% FIFO, 0%
0%
WA WA+FIFO Not Discloser FIFO
Comparison of inventory costing method
(Bangladeshi perspective)

Weighted Average Inventory Costing Method

FIFO Method
Mostly manufacturing business follow weighted average inventory
Provides
costing a higher
method net income
to reduce because
the effect of loweron
of inflation unit cost ofprofit
business the first units
purchased are matched against revenue.

The division falls between the values produced by FIFO and LIFO
Higher amount of net income makes a company more favorable to
method.
external users.

Escape the high extremes of FIFO method

Ensure income based bonus.

Escape the lowsheet

The balance extremes of LIFO
amount method is likely to approximate the
for inventory
current market value
 Comparison of inventory
costing method(cont…)

Other Countries Perspective

Weighted Average
Inventory costing Weighted + FIFO FIFO
Method
 Consistency of inventory
costing methods
♣ Extensive use doesn’t mean that the method is best for the valuation of costing.
♣ Accounting standard has not identified any one method to be the best.
♣ BAS-2 identifies FIFO and Weighted Average-Cost as acceptable methods of
determining the cost of inventory in Bangladesh.
♣ The cost formula of LIFO is not allowed for use by any company in Bangladesh under
the directive of BAS 2
♣ Other counties follow IFRS for recording inventory costing method.
♣ Other countries are using two methods together weighted average cost and FIFO
method for more efficient result. Although the most manufacturing businesses use
weighted average method
Consequences of valuation method
 Consequences of valuation method
 Income Statement effect – Valuation methods determine the value of the closing inventory. We
see if LIFO method is used in a rising-price and increasing-inventory environment, more of the
higher-cost goods (last ones in) will be accounted for in COGS as opposed to FIFO. Under this
scenario, net income will be comparatively lower than that of a company that use FIFO method of
inventory valuation.

 Cash flow effect –If a company uses the FIFO method in a rising-price and increasing-inventory
environment, it will generate a lower COGS and a higher net taxable income, and pay higher
taxes. Tax expenses are a real cash expense and lower a company's cash flow.

 Working Capital - Working capital is a key financial term for how well the company is
managing its resources required for operation. It is defined as current assets minus current
liabilities. If one method produces a higher value for the closing inventory in the income
statement, it will ultimately increase the requirement of the working capital for the company.
 Consequences of valuation
method(cont…)
Monthly Inventory Purchases*

Month Units Purchased Cost/ea Total Value

January 1,000 CR. 12 CR. 12,000

February 1,000 CR. 15 CR. 15,000

March 1,000 CR. 20 CR. 20,000

Total 3,000
Beginning Inventory = 1,000 units purchased at CR. 10 each (a total of 10,000 units)

Note: All calculations assume that there are 1,000 units left as closing inventory; (4,000 units -
3,000 units sold = 1,000 units left)
 Consequences of valuation
method(cont…)
Income Statement (simplified): January-March*
LIFO FIFO Average
Item
CR CR CR
Sales = 3,000 units @ CR. 25 each 75,000 75,000 75,000
Beginning Inventory 10,000 10,000 10,000
Purchases 47,000 47,000 47,000
Ending Inventory (appears on B/S)* 12,000 20,000 14,250
COGS 47,000 37,000 42,750
Gross Profit 23,000 38,000 32,250
Expenses 10,000 10,000 10,000
Net Income 13,000 28,000 22,250

From the above calculation and derivation, we found among all of them, valuation method LIFO
results in the lowest inventory value, highest COGS, lowest gross profit and lowest net income
whereas FIFO results in the highest inventory value, lowest COGS, highest gross profit and
highest net income. Average cost results in between the results of LIFO and FIFO. Thus use of
inventory valuation methods gives us varying results in the financial statements.
 How to Minimize & avoid
Firm’s inventory cost
Just in time manufacturing (JIT)

Consignment selling

Vendor-managed Inventory

Direct supplier-to-customer shipment

 How does inventory lose value
Inventory of various kinds can lose value due to several factors. This occurs when:

 The Market value is driven lower.

 Stock suffers spoilage or damage
 Items become obsolete or out of date.
 Items are lost to theft.

This kind of stock loss is common, and in some cases immune to complete
eradication. As a result, many companies create accounts for "leakage" or
"shrinkage," and regularly report an expense item under one of these names.
How does inventory lose value (cont…)

 The Market value is driven lower.

Market value may be driven lower by competition or
lack of customer demand.

 Stock suffers spoilage or damage.

Goods that perish, such as foods or flowers, for instance,
have by nature a short "shelf life." Shelf life becomes even shorter with
inadequate storage and handling. Disasters such as a warehouse fire, or a rail
accident during shipping can drastically reduce the value of all classes of
goods.
How does inventory lose value (cont…)

 Items become obsolete or out of date

Designer fashion clothing commands a high market value only
for a relatively short "season" of a few weeks or several months at most. Many consumer
technology products can command high market prices for a few months at most.
Magazines and other dated print media may have high value for no more than a few days.

 Items are lost to theft.

Theft can occur in the form of a warehouse burglary or store
burglary, but also from pilferage by the company's own employees, by shippers, or by
shoplifters.
Conclusion
Any question